SHANGHAI: China’s yuan eased against a firmer dollar on Tuesday, after the Federal Reserve Chair Jerome Powell said the US central bank must move “expeditiously” to raise rates, adopting a more assertive stance than markets had expected.
The greenback firmed and US Treasury yields rose across the curve after Powell on Monday said the Fed must lift rates, possibly “more aggressively”, to keep an upward price spiral from getting entrenched.
Analysts at OCBC Wing Hang Bank said recent hawkish remarks by Fed officials highlighted widening monetary policy divergence between the world’s two largest economies, piling downside pressure on the yuan.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.3664 per dollar, 13 pips firmer than the previous fix of 6.3677, but 29 pips softer than Reuters’ estimate of 6.3635. In the spot market, the onshore yuan opened at 6.3616 per dollar and was changing hands at 6.3639 at midday, 71 pips weaker than the previous late session close.
Traders said the different policy stance adopted by the PBOC, widely anticipated to ease rates further this year to prop up a slowing economy, has squeezed the yield premium between China and the United States to drag forward positions lower.
The one-year dollar/yuan swap points dropped to 870 on Tuesday morning, the lowest level since June 2020, while the yield gap between China’s benchmark 10-year government bonds and their US counterpart fell below 50 basis points for first time in three years.
“We highly suspect the (Chinese) central bank also wanted to avoid cutting policy rates this month to avoid clashing with the Fed,” analysts at Maybank said in a note, referring to a decision to keep its lending benchmark unchanged on Monday.
“The (Chinese) central bank will resume easing soon now that Fed kicked off its tightening cycle and support is needed for credit growth,” they said, expecting Beijing’s monetary easing would be measured to mitigate the impact on the currency.
China’s government vowed to step up policy support for the economy and use monetary policy tools to keep credit expansion at an appropriate pace, according to a state council meeting this week.
Several currency traders noted that trading volume has contracted this week as many market participants in Shanghai, the country’s financial hub, had to work remotely as the city continued social distancing curbs amid record high numbers of locally transmitted COVID-19 asymptomatic cases.
By midday, the global dollar index rose to 98.608 from the previous close of 98.498, while the offshore yuan was trading at 6.3758 per dollar.
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